UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF | |
THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended |
January 29, 2010 |
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF | |
THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-6357
ESTERLINE TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 13-2595091 | |||
(State or other Jurisdiction
of incorporation or organization) |
(I.R.S. Employer
Identification No.) |
500 108th Avenue N.E., Bellevue, Washington 98004
(Address of principal executive offices)(Zip Code)
Registrants telephone number, including area code 425/453-9400
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x | Accelerated filer ¨ | |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
As of March 2, 2010, 29,827,637 shares of the issuers common stock were outstanding.
2
PART I FINANCIAL INFORMATION
Item 1. | Financial Statements |
ESTERLINE TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEET
As of January 29, 2010 and October 30, 2009
(In thousands, except share amounts)
January 29,
2010 |
October 30,
2009 |
|||||
ASSETS |
(Unaudited) | |||||
Current Assets |
||||||
Cash and cash equivalents |
$ | 187,050 | $ | 176,794 | ||
Accounts receivable, net of allowances of $5,105 and $5,297 |
245,527 | 270,976 | ||||
Inventories |
||||||
Raw materials and purchased parts |
113,082 | 115,215 | ||||
Work in process |
98,618 | 98,340 | ||||
Finished goods |
60,289 | 61,727 | ||||
271,989 | 275,282 | |||||
Income tax refundable |
7,581 | 7,638 | ||||
Deferred income tax benefits |
31,059 | 31,434 | ||||
Prepaid expenses |
19,291 | 17,425 | ||||
Other current assets |
11,635 | 17,048 | ||||
Total Current Assets |
774,132 | 796,597 | ||||
Property, Plant and Equipment |
522,037 | 515,828 | ||||
Accumulated depreciation |
251,670 | 252,577 | ||||
270,367 | 263,251 | |||||
Other Non-Current Assets |
||||||
Goodwill |
731,792 | 736,808 | ||||
Intangibles, net |
409,204 | 422,082 | ||||
Debt issuance costs, net of accumulated amortization of $8,319 and $7,842 |
6,659 | 7,136 | ||||
Deferred income tax benefits |
79,593 | 79,114 | ||||
Other assets |
12,307 | 9,259 | ||||
$ | 2,284,054 | $ | 2,314,247 | |||
3
ESTERLINE TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEET
As of January 29, 2010 and October 30, 2009
(In thousands, except share amounts)
January 29,
2010 |
October 30,
2009 |
||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
(Unaudited) | ||||||
Current Liabilities |
|||||||
Accounts payable |
$ | 76,980 | $ | 82,304 | |||
Accrued liabilities |
172,636 | 191,667 | |||||
Credit facilities |
1,439 | 5,896 | |||||
Current maturities of long-term debt |
6,816 | 5,409 | |||||
Deferred income tax liabilities |
5,932 | 7,294 | |||||
Federal and foreign income taxes |
936 | 1,669 | |||||
Total Current Liabilities |
264,739 | 294,239 | |||||
Long-Term Liabilities |
|||||||
Long-term debt, net of current maturities |
525,737 | 520,158 | |||||
Deferred income tax liabilities |
127,571 | 130,456 | |||||
Pension and post-retirement obligations |
93,665 | 93,615 | |||||
Other liabilities |
21,984 | 20,027 | |||||
Shareholders Equity |
|||||||
Common stock, par value $.20 per share,
|
5,964 | 5,955 | |||||
Additional paid-in capital |
507,378 | 504,549 | |||||
Retained earnings |
745,586 | 732,861 | |||||
Accumulated other comprehensive income (loss) |
(11,355 | ) | 9,656 | ||||
Total Esterline shareholders equity |
1,247,573 | 1,253,021 | |||||
Noncontrolling interests |
2,785 | 2,731 | |||||
Total Shareholders Equity |
1,250,358 | 1,255,752 | |||||
$ | 2,284,054 | $ | 2,314,247 | ||||
4
ESTERLINE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Month Periods Ended January 29, 2010 and January 30, 2009
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended | ||||||||
January 29,
2010 |
January 30,
2009 |
|||||||
Net Sales |
$ | 339,360 | $ | 309,717 | ||||
Cost of Sales |
234,831 | 207,565 | ||||||
104,529 | 102,152 | |||||||
Expenses |
||||||||
Selling, general & administrative |
62,315 | 59,725 | ||||||
Research, development & engineering |
17,047 | 17,398 | ||||||
Other expense |
41 | 5,014 | ||||||
Total Expenses |
79,403 | 82,137 | ||||||
Operating Earnings From Continuing Operations |
25,126 | 20,015 | ||||||
Interest income |
(383 | ) | (411 | ) | ||||
Interest expense |
7,961 | 6,736 | ||||||
Income From Continuing Operations Before Income Taxes |
17,548 | 13,690 | ||||||
Income Tax Expense |
4,769 | 2,168 | ||||||
Income From Continuing Operations Including
|
12,779 | 11,522 | ||||||
Income Attributable to Noncontrolling Interests |
(54 | ) | (35 | ) | ||||
Income From Continuing Operations Attributable to Esterline |
12,725 | 11,487 | ||||||
Income From Discontinued Operations Attributable to
|
| 15,456 | ||||||
Net Earnings Attributable to Esterline |
$ | 12,725 | $ | 26,943 | ||||
Earnings Per Share Attributable to Esterline Basic: |
||||||||
Continuing operations |
$ | .43 | $ | .39 | ||||
Discontinued operations |
| .52 | ||||||
Earnings Per Share Attributable to Esterline Basic |
$ | .43 | $ | .91 | ||||
Earnings Per Share Attributable to Esterline Diluted: |
||||||||
Continuing operations |
$ | .42 | $ | .38 | ||||
Discontinued operations |
| .52 | ||||||
Earnings Per Share Attributable to Esterline Diluted |
$ | .42 | $ | .90 | ||||
5
ESTERLINE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Month Periods Ended January 29, 2010 and January 30, 2009
(Unaudited)
(In thousands)
Three Months Ended | ||||||||
January 29,
2010 |
January 30,
2009 |
|||||||
Cash Flows Provided (Used) by Operating Activities |
||||||||
Net earnings including noncontrolling interests |
$ | 12,779 | $ | 26,978 | ||||
Adjustments to reconcile net earnings including |
||||||||
noncontrolling interests to net cash provided |
||||||||
(used) by operating activities: |
||||||||
Depreciation and amortization |
18,659 | 14,491 | ||||||
Deferred income taxes |
(1,395 | ) | (1,121 | ) | ||||
Share-based compensation |
1,472 | 1,972 | ||||||
Gain on sale of discontinued operations |
| (26,379 | ) | |||||
Working capital changes, net of effect of acquisitions: |
||||||||
Accounts receivable |
22,568 | 31,646 | ||||||
Inventories |
(268 | ) | (13,219 | ) | ||||
Prepaid expenses |
(2,093 | ) | (2,460 | ) | ||||
Other current assets |
(239 | ) | 446 | |||||
Accounts payable |
(4,237 | ) | (14,810 | ) | ||||
Accrued liabilities |
(20,304 | ) | (19,349 | ) | ||||
Federal and foreign income taxes |
(456 | ) | 7,771 | |||||
Other liabilities |
2,191 | 4,712 | ||||||
Other, net |
1,676 | (6,510 | ) | |||||
30,353 | 4,168 | |||||||
Cash Flows Provided (Used) by Investing Activities |
||||||||
Purchases of capital assets |
(14,120 | ) | (7,521 | ) | ||||
Proceeds from sale of discontinued operations, |
||||||||
net of cash |
| 62,944 | ||||||
Proceeds from sale of capital assets |
61 | 94 | ||||||
Acquisitions, net of cash acquired |
(768 | ) | (250,777 | ) | ||||
(14,827 | ) | (195,260 | ) |
6
ESTERLINE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Month Periods Ended January 29, 2010 and January 30, 2009
(Unaudited)
(In thousands)
Three Months Ended | ||||||||
January 29,
2010 |
January 30,
2009 |
|||||||
Cash Flows Provided (Used) by Financing Activities |
||||||||
Proceeds provided by stock issuance under |
||||||||
employee stock plans |
1,167 | 1,575 | ||||||
Excess tax benefits from stock options exercised |
199 | | ||||||
Net change in credit facilities |
(4,442 | ) | 113,705 | |||||
Repayment of long-term debt |
(178 | ) | (1,315 | ) | ||||
(3,254 | ) | 113,965 | ||||||
Effect of Foreign Exchange Rates on Cash |
(2,016 | ) | (2,287 | ) | ||||
Net Increase (Decrease) in Cash and Cash Equivalents |
10,256 | (79,414 | ) | |||||
Cash and Cash Equivalents Beginning of Period |
176,794 | 160,645 | ||||||
Cash and Cash Equivalents End of Period |
$ | 187,050 | $ | 81,231 | ||||
Supplemental Cash Flow Information |
||||||||
Cash Paid for Interest |
$ | 7,118 | $ | 6,493 | ||||
Cash Paid for Taxes |
6,812 | 7,011 |
7
ESTERLINE TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Month Periods Ended January 29, 2010 and January 30, 2009
1. | The consolidated balance sheet as of January 29, 2010, the consolidated statement of operations for the three month periods ended January 29, 2010, and January 30, 2009, and the consolidated statement of cash flows for the three month periods ended January 29, 2010, and January 30, 2009, are unaudited but, in the opinion of management, all of the necessary adjustments, consisting of normal recurring accruals, have been made to present fairly the financial statements referred to above in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the above statements do not include all of the footnotes required for complete financial statements. The results of operations and cash flows for the interim periods presented are not necessarily indicative of results that can be expected for the full year. |
2. | The notes to the consolidated financial statements in the Companys Annual Report on Form 10-K for the fiscal year ended October 30, 2009, provide a summary of significant accounting policies and additional financial information that should be read in conjunction with this Form 10-Q. |
3. | The timing of the Companys revenues is impacted by the purchasing patterns of customers and, as a result, revenues are not generated evenly throughout the year. Moreover, the Companys first fiscal quarter, November through January, includes significant holiday periods in both Europe and North America. |
4. | Basic earnings per share is computed on the basis of the weighted average number of shares outstanding during the year. Diluted earnings per share includes the dilutive effect of stock options. Common shares issuable from stock options that are excluded from the calculation of diluted earnings per share because they were anti-dilutive were 646,901 and 1,250,960 in the first fiscal quarter of 2010 and 2009, respectively. Shares used for calculating earnings per share are disclosed in the following table. |
(In thousands) | Three Months Ended | |||
January 29,
2010 |
January 30,
2009 |
|||
Shares Used for Basic Earnings Per Share |
29,789 | 29,664 | ||
Shares Used for Diluted Earnings Per Share |
30,218 | 29,865 |
5. | Recent Accounting Pronouncements |
In December 2007, the Financial Accounting Standards Board issued a standard that significantly changes the way companies account for business combinations. The standard will generally require more assets acquired and more liabilities assumed to be measured at fair value on the date of acquisition. Under the standard, acquisition-related transaction costs
8
are expensed when incurred and are no longer included in goodwill as a cost of acquiring the business. The standard also requires acquirers to estimate the acquisition-date fair value of any contingent consideration and to recognize any subsequent changes in the fair value of the contingent consideration in earnings. In addition, restructuring costs the acquirer expects, but is not obligated to incur, will be recognized separately from the business acquisition. The Company adopted this standard in the first quarter of fiscal 2010. The new standard is applied prospectively to all business combinations with an acquisition date on or after October 31, 2009. No business combination transactions occurred in the three months ended January 29, 2010.
In December 2007, the Financial Accounting Standards Board issued a standard that changes the way companies account for and report noncontrolling interests (minority interests) of consolidated subsidiaries. The Company adopted this standard in the first quarter of fiscal year 2010 with no impact to the Companys financial statements other than the Company has changed the presentation of noncontrolling interests on the Consolidated Balance Sheet and Consolidated Statement of Operations. Noncontrolling interests of $2.8 million at January 29, 2010, and $2.7 million of noncontrolling interests at October 30, 2009, are now included within Equity.
6. | The Companys comprehensive income (loss) is as follows: |
(In thousands) | Three Months Ended | |||||||
January 29,
2010 |
January 30,
2009 |
|||||||
Net Earnings |
$ | 12,725 | $ | 26,943 | ||||
Change in Fair Value of Derivative Financial Instruments,
|
(1,827 | ) | 525 | |||||
Adjustment for Minimum Pension Liability, Net of Tax
|
88 | 424 | ||||||
Foreign Currency Translation Adjustment |
(19,272 | ) | (27,055 | ) | ||||
Comprehensive Income (Loss) |
$ | (8,286 | ) | $ | 837 | |||
The Companys accumulated other comprehensive income (loss) is comprised of the following:
(In thousands) |
January 29,
2010 |
October 30,
2009 |
||||||
Currency translation adjustment |
$ | 33,886 | $ | 53,158 | ||||
Net unrealized gain on derivative contracts |
9,538 | 11,365 | ||||||
Employee benefit plans |
(54,779 | ) | (54,867 | ) | ||||
Total accumulated other comprehensive income (loss) |
$ | (11,355 | ) | $ | 9,656 | |||
9
7. | On January 26, 2009, the Company acquired all of the outstanding capital stock of Racal Acoustics Global Ltd. (Racal Acoustics) for approximately £122.6 million or $171.3 million in cash, including acquisition costs. Racal Acoustics develops and manufactures high technology ruggedized personal communication equipment for the defense and avionics segment. The acquisition expands the scale of the Companys existing avionics and controls business. Racal Acoustics is included in the Avionics & Controls segment. |
The following summarizes the fair value of the assets acquired and liabilities assumed at the date of acquisition. The Company recorded goodwill of $94.0 million. The amount allocated to goodwill is not expected to be deductible for income tax purposes.
(In thousands) | |||
As of January 26, 2009 |
|||
Current assets |
$ | 30,319 | |
Property, plant and equipment |
2,931 | ||
Intangible assets subject to amortization |
|||
Programs (15 year weighted average useful life) |
90,045 | ||
Goodwill |
93,986 | ||
Total assets acquired |
217,281 | ||
Current liabilities assumed |
20,747 | ||
Deferred tax liabilities |
25,213 | ||
Net assets acquired |
$ | 171,321 | |
On December 15, 2008, the Company acquired all of the outstanding capital stock of NMC Group, Inc. (NMC) for approximately $90.1 million in cash, including acquisition costs. NMC designs and manufactures specialized light-weight fasteners principally for commercial aviation applications. The acquisition expands the scale of the Companys existing advanced materials business. NMC is included in the Advanced Materials segment.
The following summarizes the fair value of the assets acquired and liabilities assumed at the date of acquisition. The Company recorded goodwill of $40.8 million. The amount allocated to goodwill is expected to be deductible for income tax purposes.
10
(In thousands) | |||
As of December 15, 2008 |
|||
Current assets |
$ | 7,925 | |
Property, plant and equipment |
3,246 | ||
Intangible assets subject to amortization |
|||
Programs (15 year weighted average useful life) |
39,580 | ||
Goodwill |
40,796 | ||
Other assets |
19 | ||
Total assets acquired |
91,566 | ||
Current liabilities assumed |
1,427 | ||
Net assets acquired |
$ | 90,139 | |
8. | On November 3, 2008, the Company sold U.K.-based Muirhead Aerospace Limited and Traxsys Input Products Limited, which were included in the Sensors & Systems segment, for approximately U.K. £40.0 million or $63.4 million, resulting in an after-tax gain of $15.5 million. As a result, the consolidated financial statements present Muirhead Aerospace Limited and Traxsys Input Products Limited as a discontinued operation. |
The operating results of the discontinued operations for the first quarter of 2009 consisted of the following:
(In thousands) |
January 30,
2009 |
||
Sales |
$ | | |
Income from discontinued operations
|
26,379 | ||
Income tax expense |
10,923 | ||
Income from discontinued operations |
$ | 15,456 | |
9. | The effective income tax rate for the first fiscal quarter of 2010 was 25.5% (before a $0.3 million tax expense) compared with 18.9% (before a $0.4 million tax benefit) for the prior-year period. The $0.3 million tax expense in the first fiscal quarter of 2010 was the result of a change in the tax law of France. The $0.4 million tax benefit in the first fiscal quarter of 2009 was the result of two events. The first event was a $2.0 million reduction of previously recorded withholding tax liabilities as a result of the enactment of a U.S.-Canadian tax treaty. The second event was the recording of a $1.6 million penalty due to a development with regard to certain foreign tax laws. The effective tax rate differed from the statutory rate in the first fiscal quarters of 2010 and 2009, as both years benefited from various tax credits and certain foreign interest expense deductions. |
It is reasonably possible that within the next 12 months, $6.7 million of unrecognized foreign tax benefits associated with losses on the disposition of assets could decrease as a result of the expiration of a statute of limitations and be recognized in net income.
11
10. |
As of January 29, 2010, the Company had three share-based compensation plans, which are described below. The compensation cost that has been charged against income for those plans for the first fiscal quarters of 2010 and 2009 was $1.5 million and $2.0 million, respectively. During the first fiscal quarters of 2010 and 2009, the Company issued 46,482 and 52,972 shares, respectively, under its employee stock plans. |
Employee Stock Purchase Plan
The Company converted the ESPP to a safe harbor design on December 16, 2008. Under the safe harbor design, shares are purchased by participants at 95% of the market value on the purchase date and, therefore, compensation cost is no longer recorded under the ESPP.
Equity Incentive Plan
Under the equity incentive plan, option exercise prices are equal to the fair market value of the Companys common stock on the date of grant. The Company granted 337,800 options and 378,800 options in the three-month periods ended January 29, 2010, and January 30, 2009, respectively. The weighted-average grant date fair value of options granted during the three-month periods ended January 29, 2010, and January 30, 2009, was $21.15 per share and $15.92 per share, respectively.
The fair value of each option granted by the Company was estimated using a Black-Scholes pricing model which uses the assumptions noted in the following table. The Company uses historical data to estimate volatility of the Companys common stock and option exercise and employee termination assumptions. The risk-free rate for the contractual life of the option is based on the U.S. Treasury zero coupon issues in effect at the time of the grant.
Three Months Ended | ||||||
January 29,
2010 |
January 30,
2009 |
|||||
Risk-free interest rate |
2.42 4.0 | % | 1.43 3.12 | % | ||
Volatility |
43.0 43.2 | % | 36.8 43.1 | % | ||
Expected life (years) |
4.5 9.5 | 4.5 9.5 | ||||
Dividends |
| |
Employee Sharesave Scheme
In April 2009, the Company offered shares under its employee sharesave scheme for U.K. employees. This plan allows participants the option to purchase shares at 95% of the market price of the stock as of the beginning of the offering period. The term of these options is three years. The sharesave scheme is not a safe-harbor design, and therefore, compensation cost is recognized on this plan.
Under the sharesave scheme, option exercise prices are equal to the fair market value of the Companys common stock on the date of grant. The Company granted 164,199 options in fiscal 2009, with a weighted-average grant date fair value of $7.49 per share.
12
The fair value of the awards under the employee sharesave scheme was estimated using a Black-Scholes pricing model which uses the assumptions noted in the following table. The risk-free rate for the contractual life of the option is based on the U.S. Treasury zero coupon issues in effect at the time of the grant.
January 29,
2010 |
|||
Risk-free interest rate |
0.58 | % | |
Volatility |
50.08 | % | |
Expected life (years) |
3 | ||
Dividends |
|
11. | The Companys pension plans principally include a U.S. pension plan maintained by Esterline and a non-U.S. plan maintained by CMC. Components of periodic pension cost consisted of the following: |
(In thousands) | Three Months Ended | |||||||
January 29,
2010 |
January 30,
2009 |
|||||||
Components of Net Periodic Pension Cost |
||||||||
Service cost |
$ | 1,890 | $ | 1,475 | ||||
Interest cost |
4,495 | 4,575 | ||||||
Expected return on plan assets |
(4,373 | ) | (3,509 | ) | ||||
Amortization of prior service cost |
5 | | ||||||
Amortization of actuarial loss |
1,826 | 998 | ||||||
Net Periodic Cost |
$ | 3,843 | $ | 3,539 | ||||
The Companys principal post-retirement plans include non-U.S. plans, which are non-contributory healthcare and life insurance plans. The components of expense of these other retirement benefits consisted of the following:
(In thousands) | Three Months Ended | |||||||
January 29,
2010 |
January 30,
2009 |
|||||||
Components of Net Periodic Pension Cost |
||||||||
Service cost |
$ | 78 | $ | 82 | ||||
Interest cost |
174 | 161 | ||||||
Amortization of actuarial gain |
(19 | ) | (19 | ) | ||||
Net Periodic Cost |
$ | 233 | $ | 224 | ||||
12. | Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy has been established that prioritizes the inputs to valuation techniques used to measure fair value. An asset or liabilitys level within the fair value hierarchy is |
13
based on the lowest level of input that is significant to the fair value measurement. The hierarchy of fair value measurements is described below:
Level 1 Valuations are based on quoted prices that the Company has the ability to obtain in actively traded markets for identical assets and liabilities. Since valuations are based on quoted prices that are readily and regularly available in an active market or exchange traded market, a valuation of these instruments does not require a significant degree of judgment.
Level 2 Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 Valuations are based on model-based techniques for which some or all of the assumptions are obtained from indirect market information that is significant to the overall fair value measurement and which require a significant degree of management judgment.
The following table sets forth the Companys financial assets and liabilities that were measured at fair value on a recurring basis by level within the fair value hierarchy at January 29, 2010 and October 30, 2009:
(In thousands) |
Level 2 | |||||
January 29,
2010 |
October 30,
2009 |
|||||
Assets: |
||||||
Derivative contracts designated as |
||||||
hedging instruments |
$ | 14,213 | $ | 16,590 | ||
Derivative contracts not designated as |
||||||
hedging instruments |
$ | 537 | $ | 442 | ||
Embedded derivatives |
$ | 10 | $ | | ||
Liabilities: |
||||||
Derivative contracts designated as |
||||||
hedging instruments |
$ | 1,866 | $ | 181 | ||
Derivative contracts not designated as |
||||||
hedging instruments |
$ | 1,377 | $ | 1,405 | ||
Embedded derivatives |
$ | 1,009 | $ | 588 |
The Companys embedded derivatives are the result of entering into sales or purchase contracts that are denominated in a currency other than the Companys functional currency or the suppliers or customers functional currency. The fair value is determined by calculating the difference between quoted exchange rates at the time the contract was entered into and the period end exchange rate. These contracts are categorized as Level 2 in the fair value hierarchy.
14
The Companys derivative contracts consist of foreign currency exchange contracts and interest rate swap agreements. These derivative contracts are over the counter and their fair value is determined using modeling techniques that include market inputs such as interest rates, yield curves, and currency exchange rates. These contracts are categorized as Level 2 in the fair value hierarchy.
13. | The Company uses derivative financial instruments in the form of foreign currency forward exchange contracts and interest rate swap contracts for the purpose of minimizing exposure to changes in foreign currency exchange rates on business transactions and interest rates, respectively. The Companys policy is to execute such instruments with banks the Company believes to be credit worthy and not to enter into derivative financial instruments for speculative purposes. These derivative financial instruments do not subject the Company to undue risk, as gains and losses on these instruments generally offset gains and losses on the underlying assets, liabilities, or anticipated transactions that are being hedged. |
All derivative financial instruments are recorded at fair value in the Consolidated Balance Sheet. For a derivative that has not been designated as an accounting hedge, the change in the fair value is recognized immediately through earnings. For a derivative that has been designated as an accounting hedge of an existing asset or liability (a fair value hedge), the change in the fair value of both the derivative and underlying asset or liability is recognized immediately through earnings. For a derivative designated as an accounting hedge of an anticipated transaction (a cash flow hedge), the change in the fair value is recorded on the Consolidated Balance Sheet in Accumulated Other Comprehensive Income (AOCI) to the extent the derivative is effective in mitigating the exposure related to the anticipated transaction. The change in the fair value related to the ineffective portion of the hedge, if any, is immediately recognized in earnings. The amount recorded within AOCI is reclassified into earnings in the same period during which the underlying hedged transaction affects earnings.
The fair values of derivative instruments are presented on a gross basis, as the Company does not have any derivative contracts which are subject to master netting arrangements. The Company does not have any hedges with credit-risk-related contingent features or that required the posting of collateral as of January 29, 2010. The cash flows from derivative contracts are recorded in operating activities in the Consolidated Statement of Cash Flows.
Foreign Currency Forward Exchange Contracts
The Company transacts business in various foreign currencies which subjects the Companys cash flows and earnings to exposure related to changes in foreign currency exchange rates. These exposures arise primarily from purchases or sales of products and services from third parties. Foreign currency forward exchange contracts provide for the purchase or sale of foreign currencies at specified future dates at specified exchange rates and are used to offset changes in the fair value of certain assets or liabilities or forecasted cash flows resulting from transactions denominated in foreign currencies. As of January 29, 2010, and October 30, 2009, the Company had outstanding foreign currency forward exchange contracts principally to sell U.S. dollars with notional amounts of $251.1 million and $275.3 million, respectively.
15
These notional values consist primarily of contracts for the European euro, British pound sterling and Canadian dollar, and are stated in U.S. dollar equivalents at spot exchange rates at the respective dates.
Interest Rate Swaps
The Company manages its exposure to interest rate risk by maintaining an appropriate mix of fixed and variable rate debt, which over time should moderate the costs of debt financing. When considered necessary, the Company may use financial instruments in the form of interest rate swaps to help meet this objective. In June 2009, the Company entered into an interest rate swap agreement on the $175.0 million Senior Subordinated Notes due in 2013. The swap agreement exchanged the fixed interest rate of 7.75% for a variable interest rate on the $175.0 million principal amount outstanding. The variable interest rate is based upon LIBOR plus 5.37% and was 5.60% at January 29, 2010. The fair value of the Companys interest rate swap was an $859,000 asset at January 29, 2010, and was estimated by discounting expected cash flows using market interest rates. The Company records interest receivable and interest payable on interest rate swaps on a net basis. The Company recognized a net interest receivable of $471,000 at January 29, 2010. A $2.9 million deferred gain on a terminated interest rate swap is being amortized in proportion to the repayment of the underlying debt. The unamortized balance at January 29, 2010, was $2.2 million. The gain will be amortized through 2013.
Embedded Derivative Instruments
The Companys embedded derivatives are the result of entering into sales or purchase contracts that are denominated in a currency other than the Companys functional currency or the suppliers or customers functional currency.
Net Investment Hedge
In February 2006, the Company entered into a term loan for £57.0 million. The Company designated the term loan a hedge of the investment in a certain U.K. business unit. The term loan was fully
repaid in June 2009. A cumulative foreign currency loss of $4.8 million resulting from the accounting of the term loan as a net investment hedge will remain in other comprehensive income in shareholders equity until the hedged investment
Fair Value of Derivative Instruments
Fair values of derivative instruments in the Consolidated Balance Sheet at January 29, 2010, and October 30, 2009, consisted of:
16
(In thousands) |
Classification |
Fair Value | |||||||
January 29,
2010 |
October 30,
2009 |
||||||||
Foreign currency forward |
|||||||||
exchange contracts |
Other current assets | $ | 12,019 | $ | 17,032 | ||||
Foreign currency forward |
|||||||||
exchange contracts |
Other assets | $ | 2,731 | $ | | ||||
Foreign currency forward |
|||||||||
exchange contracts |
Accrued liabilities | $ | 2,644 | $ | 1,586 | ||||
Foreign currency forward |
|||||||||
exchange contracts |
Other liabilities | $ | 599 | $ | | ||||
Embedded derivative |
|||||||||
instruments |
Other current assets | $ | 10 | $ | | ||||
Embedded derivative |
|||||||||
instruments |
Accrued liabilities | $ | 1,009 | $ | 588 | ||||
Interest rate swap |
Long-term debt, net of current maturities | $ | 859 | $ | (269 | ) |
The effect of derivative instruments on the Consolidated Statement of Operations for the first fiscal quarter in 2010 and 2009 consisted of:
(In thousands) |
Location of
Gain (Loss) |
January 29,
2010 |
January 30,
2009 |
|||||||
Fair Value Hedges: |
||||||||||
Interest rate swap contracts |
Interest Expense | $ | 632 | $ | | |||||
Embedded derivatives |
Sales | $ | (425 | ) | $ | 711 | ||||
Cash Flow Hedges: |
||||||||||
Foreign currency forward exchange contracts: |
||||||||||
Amount of gain (loss) recognized |
||||||||||
in AOCI (effective portion) |
AOCI | $ | (4,497 | ) | $ | 6,279 | ||||
Amount of gain (loss) reclassified |
||||||||||
from AOCI into income |
Sales | $ | 1,998 | $ | (5,422 | ) | ||||
Net Investment Hedges: |
||||||||||
U.K. term loan |
AOCI | $ | | $ | 3,450 |
During the first fiscal quarter of 2010, the Company recorded gains of $0.1 million on foreign currency forward exchange contracts that have not been designated as an accounting hedge. These foreign currency exchange gains are included in selling, general and administrative expense.
There was no significant impact to the Companys earnings related to the ineffective portion of any hedging instruments during the first fiscal quarter of 2010. In addition, there was no significant impact to the Companys earnings when a hedged firm commitment no longer
17
qualified as a fair value hedge or when a hedged forecasted transaction no longer qualified as a cash flow hedge during the first fiscal quarter of 2010.
Amounts included in AOCI are reclassified into earnings when the hedged transaction settles. The Company expects to reclassify approximately $10.2 million of net gain into earnings over the next 12 months. The maximum duration of the Companys foreign currency cash flow hedge contracts at January 29, 2010, is 26 months.
14. | Segment information: |
Business segment information for continuing operations includes the segments of Avionics & Controls, Sensors & Systems and Advanced Materials.
(In thousands) | Three Months Ended | |||||||
January 29,
2010 |
January 30,
2009 |
|||||||
Sales |
||||||||
Avionics & Controls |
$ | 170,257 | $ | 128,468 | ||||
Sensors & Systems |
74,742 | 84,555 | ||||||
Advanced Materials |
94,361 | 96,694 | ||||||
Total Sales |
$ | 339,360 | $ | 309,717 | ||||
Income from Continuing Operations |
||||||||
Avionics & Controls |
$ | 19,432 | $ | 14,475 | ||||
Sensors & Systems |
5,096 | 10,252 | ||||||
Advanced Materials |
8,730 | 9,974 | ||||||
Segment Earnings |
33,258 | 34,701 | ||||||
Corporate expense |
(8,091 | ) | (9,672 | ) | ||||
Other expense |
(41 | ) | (5,014 | ) | ||||
Interest income |
383 | 411 | ||||||
Interest expense |
(7,961 | ) | (6,736 | ) | ||||
$ | 17,548 | $ | 13,690 | |||||
15. | The acquisition of Racal Acoustics was funded from cash proceeds from the sale of U.K.-based Muirhead and Traxsys and the Companys line of credit. To facilitate the acquisition of Racal Acoustics, the Company executed a $159.7 million U.S. dollar-denominated intercompany loan with a wholly owned subsidiary, of which its functional currency is the pound sterling. Due to holding of pounds sterling to fund the acquisition during a period of foreign exchange volatility, the Company incurred a $7.9 million foreign currency transaction loss in January 2009, which was recorded in other expense. |
16. |
The following schedules set forth condensed consolidating financial information as required by Rule 3-10 of Securities and Exchange Commission Regulation S-X as of January 29, |
18
2010, and October 30, 2009, and for the applicable periods ended January 29, 2010, and January 30, 2009, for (a) Esterline Technologies Corporation (the Parent); (b) on a combined basis, the subsidiary guarantors (Guarantor Subsidiaries) of the Credit Agreement, Senior Subordinated Notes due 2013 (Senior Subordinated Notes) and Senior Notes due 2017 (Senior Notes) which include Advanced Input Devices, Inc., Angus Electronics Co., Armtec Countermeasures Co., Armtec Countermeasures TNO Co., Armtec Defense Products Co., AVISTA, Incorporated, BVR Technologies Co., CMC DataComm Inc., CMC Electronics Acton Inc., CMC Electronics Aurora Inc., EA Technologies Corporation, Equipment Sales Co., Esterline Canadian Holding Corporation, Esterline International Company, Esterline Sensors Services Americas, Inc., Esterline Technologies Holdings Limited, Esterline Technologies Ltd. (England), H.A. Sales Co., Hauser Inc., Hytek Finishes Co., Janco Corporation, Kirkhill-TA Co., Korry Electronics Co., Leach Holding Corporation, Leach International Corporation, Leach International Mexico S. de R.L. de C.V. (Mexico), Leach Technology Group, Inc., Mason Electric Co., MC Tech Co., Memtron Technologies Co., NMC Group, Inc., Norwich Aero Products, Inc., Palomar Products, Inc., Pressure Systems, Inc., Pressure Systems International, Inc., Racal Acoustics Inc., UMM Electronics Inc., and (c) on a combined basis, the subsidiary non-guarantors (Non-Guarantor Subsidiaries), which include Acoustics Holdco Limited, Auxitrol S.A., BAE Systems Canada/Air TV LLC, CMC Electronics Inc., CMC Electronics ME Inc., Darchem Engineering Ltd., Darchem Holding Ltd., Esterline Acquisition Ltd., Esterline Canadian Acquisition Corporation, Esterline Canada Limited Partnership, Esterline Foreign Sales Corporation, Esterline Input Devices Asia Ltd., Esterline Input Devices (Shanghai) Ltd., Esterline Mexico S. de R.L. de C.V., Esterline Sensors Services Asia PTE Ltd., Esterline Technologies Acquisition Ltd., Esterline Technologies Denmark ApS, Esterline Technologies Europe Limited, Guizhou Leach-Tianyi Aviation Electrical Company Ltd., Leach International Asia-Pacific Ltd., Leach International Europe S.A., Leach International Germany GmbH, Leach International U.K. Ltd., Leach Italia Srl., LRE Medical GmbH, Pressure Systems International Ltd., Rag Newco Ltd., Racal Acoustics Global Ltd., Racal Acoustics Group Ltd., Racal Acoustics Holdings Limited, Racal Acoustics Limited, TA Mfg. Ltd., UKCI Limited, Wallop Defence Systems Ltd., Wallop Industries Ltd., Weston Aero 2003, and Weston Aerospace Ltd. Muirhead Aerospace Limited (Muirhead), Norcroft Dynamics Ltd. (Norcroft), and Traxsys Input Products Ltd. (Traxsys), were Non-Guarantor Subsidiaries as of October 31, 2008. As explained in Note 8, Muirhead, Norcroft, and Traxsys were sold on November 3, 2008, and, accordingly, Muirhead, Norcroft, and Traxsys were excluded from the Condensed Consolidating Balance Sheet at January 30, 2009, and accounted for as a discontinued operation in the Condensed Consolidating Statement of Operations and Cash Flows for the three-month period ended January 30, 2009. The Guarantor Subsidiaries are direct and indirect wholly-owned subsidiaries of Esterline Technologies Corporation and have fully and unconditionally, jointly and severally, guaranteed the Credit Agreement, Senior Notes and Senior Subordinated Notes. |
19
Condensed Consolidating Balance Sheet as of January 29, 2010
(In thousands) | |||||||||||||||||
Parent |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminations | Total | |||||||||||||
Assets |
|||||||||||||||||
Current Assets |
|||||||||||||||||
Cash and cash equivalents |
$ | 69,654 | $ | 4,204 | $ | 113,192 | $ | | $ | 187,050 | |||||||
Accounts receivable, net |
| 105,334 | 140,193 | | 245,527 | ||||||||||||
Inventories |
| 120,162 | 151,827 | | 271,989 | ||||||||||||
Income tax refundable |
| | 7,581 | | 7,581 | ||||||||||||
Deferred income tax benefits |
19,507 | (1,624 | ) | 13,176 | | 31,059 | |||||||||||
Prepaid expenses |
| 6,102 | 13,189 | | 19,291 | ||||||||||||
Other current assets |
| | 11,635 | | 11,635 | ||||||||||||
Total Current Assets |
89,161 | 234,178 | 450,793 | | 774,132 | ||||||||||||
Property, Plant &
|
1,424 | 165,702 | 103,241 | | 270,367 | ||||||||||||
Goodwill |
| 249,495 | 482,297 | | 731,792 | ||||||||||||
Intangibles, Net |
| 98,074 | 311,130 | | 409,204 | ||||||||||||
Debt Issuance Costs, Net |
6,659 | | | | 6,659 | ||||||||||||
Deferred Income Tax Benefits |
43,994 | 3,443 | 32,156 | | 79,593 | ||||||||||||
Other Assets |
787 | 1,603 | 9,917 | | 12,307 | ||||||||||||
Amounts Due (To) From Subsidiaries |
| 189,384 | | (189,384 | ) | | |||||||||||
Investment in Subsidiaries |
1,771,192 | 248,365 | 248,417 | (2,267,974 | ) | | |||||||||||
Total Assets |
$ | 1,913,217 | $ | 1,190,244 | $ | 1,637,951 | $ | (2,457,358 | ) | $ | 2,284,054 | ||||||
20
(In thousands) | ||||||||||||||||||
Parent |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminations | Total | ||||||||||||||
Liabilities and Shareholders Equity |
|
|||||||||||||||||
Current Liabilities |
||||||||||||||||||
Accounts payable |
$ | 481 | $ | 23,264 | $ | 53,235 | $ | | $ | 76,980 | ||||||||
Accrued liabilities |
8,640 | 62,983 | 101,013 | | 172,636 | |||||||||||||
Credit facilities |
| | 1,439 | | 1,439 | |||||||||||||
Current maturities of
|
6,250 | 226 | 340 | | 6,816 | |||||||||||||
Deferred income tax liabilities |
424 | 279 | 5,229 | | 5,932 | |||||||||||||
Federal and foreign
|
(13,748 | ) | (2,326 | ) | 17,010 | | 936 | |||||||||||
Total Current Liabilities |
2,047 | 84,426 | 178,266 | | 264,739 | |||||||||||||
Long-Term Debt, Net |
471,788 | 42,218 | 11,731 | | 525,737 | |||||||||||||
Deferred Income Tax Liabilities |
34,370 | 32 | 93,169 | | 127,571 | |||||||||||||
Pension and Post-Retirement Obligations |
12,636 | 52,732 | 28,297 | | 93,665 | |||||||||||||
Other Liabilities |
8,467 | 293 | 13,224 | | 21,984 | |||||||||||||
Amounts Due To (From) Subsidiaries |
136,336 | | 141,027 | (277,363 | ) | | ||||||||||||
Shareholders Equity |
1,247,573 | 1,010,543 | 1,172,237 | (2,179,995 | ) | 1,250,358 | ||||||||||||
Total Liabilities and Shareholders Equity |
$ | 1,913,217 | $ | 1,190,244 | $ | 1,637,951 | $ | (2,457,358 | ) | $ | 2,284,054 | |||||||
21
Condensed Consolidating Statement of Operations for the three month period ended January 29, 2010.
(In thousands) | ||||||||||||||||||||
Parent |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminations | Total | ||||||||||||||||
Net Sales |
$ | | $ | 171,826 | $ | 167,534 | $ | | $ | 339,360 | ||||||||||
Cost of Sales |
| 116,863 | 117,968 | | 234,831 | |||||||||||||||
| 54,963 | 49,566 | | 104,529 | ||||||||||||||||
Expenses |
||||||||||||||||||||
Selling, general and administrative |
| 30,256 | 32,059 | | 62,315 | |||||||||||||||
Research, development
|
| 6,131 | 10,916 | | 17,047 | |||||||||||||||
Other expense |
| | 41 | | 41 | |||||||||||||||
Total Expenses |
| 36,387 | 43,016 | | 79,403 | |||||||||||||||
Operating Earnings From Continuing Operations |
| 18,576 | 6,550 | | 25,126 | |||||||||||||||
Interest income | (3,880 | ) | (630 | ) | (10,113 | ) | 14,240 | (383 | ) | |||||||||||
Interest expense | 6,639 | 4,988 | 10,574 | (14,240 | ) | 7,961 | ||||||||||||||
Income (Loss) From
|
(2,759 | ) | 14,218 | 6,089 | | 17,548 | ||||||||||||||
Income Tax Expense (Benefit) |
(702 | ) | 3,499 | 1,972 | | 4,769 | ||||||||||||||
Income (Loss) From
|
(2,057 | ) | 10,719 | 4,117 | | 12,779 | ||||||||||||||
Income Attributable to Noncontrolling Interests |
| | (54 | ) | | (54 | ) | |||||||||||||
Income (Loss) From
|
||||||||||||||||||||
Attributable to Esterline |
(2,057 | ) | 10,719 | 4,063 | | 12,725 | ||||||||||||||
Equity in Net Income of Consolidated Subsidiaries |
14,782 | 3,305 | (258 | ) | (17,829 | ) | | |||||||||||||
Net Income (Loss)
|
$ | 12,725 | $ | 14,024 | $ | 3,805 | $ | (17,829 | ) | $ | 12,725 | |||||||||
22
Condensed Consolidating Statement of Cash Flows for the three month period ended January 29, 2010.
(In thousands) | ||||||||||||||||||||
Parent |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminations | Total | ||||||||||||||||
Cash Flows Provided (Used)
|
|
|||||||||||||||||||
Net earnings (loss) including noncontrolling interests |
$ | 12,725 | $ | 14,024 | $ | 3,859 | $ | (17,829 | ) | $ | 12,779 | |||||||||
Depreciation & amortization |
| 8,128 | 10,531 | | 18,659 | |||||||||||||||
Deferred income taxes |
506 | 28 | (1,929 | ) | | (1,395 | ) | |||||||||||||
Share-based compensation |
| 685 | 787 | | 1,472 | |||||||||||||||
Working capital changes, net of effect of acquisitions: |
||||||||||||||||||||
Accounts receivable |
| 14,366 | 8,202 | | 22,568 | |||||||||||||||
Inventories |
| 1,684 | (1,952 | ) | | (268 | ) | |||||||||||||
Prepaid expenses |
| (1,153 | ) | (940 | ) | | (2,093 | ) | ||||||||||||
Other current assets |
| | (239 | ) | | (239 | ) | |||||||||||||
Accounts payable |
(97 | ) | 320 | (4,460 | ) | | (4,237 | ) | ||||||||||||
Accrued liabilities |
(4,538 | ) | 1,235 | (17,001 | ) | | (20,304 | ) | ||||||||||||
Federal & foreign
|
(1,250 | ) | (940 | ) | 1,734 | | (456 | ) | ||||||||||||
Other liabilities |
191 | 1,200 | 800 | | 2,191 | |||||||||||||||
Other, net |
| 48 | 1,628 | | 1,676 | |||||||||||||||
7,537 | 39,625 | 1,020 | (17,829 | ) | 30,353 | |||||||||||||||
Cash Flows Provided (Used)
|
|
|||||||||||||||||||
Purchases of capital assets |
(13 | ) | (5,136 | ) | (8,971 | ) | | (14,120 | ) | |||||||||||
Proceeds from sale of
|
| 59 | 2 | | 61 | |||||||||||||||
Acquisitions of businesses,
|
| (360 | ) | (408 | ) | | (768 | ) | ||||||||||||
(13 | ) | (5,437 | ) | (9,377 | ) | | (14,827 | ) |
23
(In thousands) | |||||||||||||||||||
Parent |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminations | Total | |||||||||||||||
Cash Flows Provided (Used)
|
|
||||||||||||||||||
Proceeds provided by stock issuance under employee stock plans |
1,167 | | | | 1,167 | ||||||||||||||
Excess tax benefits from stock options exercised |
199 | | | | 199 | ||||||||||||||
Net change in credit facilities |
| | (4,442 | ) | | (4,442 | ) | ||||||||||||
Repayment of long-term debt |
(162 | ) | (118 | ) | 102 | | (178 | ) | |||||||||||
Net change in intercompany financing |
13,019 | (34,619 | ) | 3,771 | 17,829 | | |||||||||||||
14,223 | (34,737 | ) | (569 | ) | 17,829 | (3,254 | ) | ||||||||||||
Effect of foreign exchange rates on cash |
| 132 | (2,148 | ) | | (2,016 | ) | ||||||||||||
Net increase (decrease) in
|
21,747 | (417 | ) | (11,074 | ) | | 10,256 | ||||||||||||
Cash and cash equivalents
|
47,907 | 4,621 | 124,266 | | 176,794 | ||||||||||||||
Cash and cash equivalents
|
$ | 69,654 | $ | 4,204 | $ | 113,192 | $ | | $ | 187,050 | |||||||||
24
Condensed Consolidating Balance Sheet as of October 30, 2009
(In thousands) | ||||||||||||||||||
Parent |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminations | Total | ||||||||||||||
Assets |
||||||||||||||||||
Current Assets |
||||||||||||||||||
Cash and cash equivalents |
$ | 47,907 | $ | 4,621 | $ | 124,266 | $ | | $ | 176,794 | ||||||||
Accounts receivable, net |
| 119,700 | 151,276 | | 270,976 | |||||||||||||
Inventories |
| 121,846 | 153,436 | | 275,282 | |||||||||||||
Income tax refundable |
| | 7,638 | | 7,638 | |||||||||||||
Deferred income tax benefits |
21,417 | (2,172 | ) | 12,189 | | 31,434 | ||||||||||||
Prepaid expenses |
| 4,949 | 12,476 | | 17,425 | |||||||||||||
Other current assets |
| | 17,048 | | 17,048 | |||||||||||||
Total Current Assets |
69,324 | 248,944 | 478,329 | | 796,597 | |||||||||||||
Property, Plant & Equipment, Net |
1,527 | 160,099 | 101,625 | | 263,251 | |||||||||||||
Goodwill |
| 249,134 | 487,674 | | 736,808 | |||||||||||||
Intangibles, Net |
| 100,185 | 321,897 | | 422,082 | |||||||||||||
Debt Issuance Costs, Net |
7,136 | | | | 7,136 | |||||||||||||
Deferred Income Tax Benefits |
43,514 | 3,623 | 31,977 | | 79,114 | |||||||||||||
Other Assets |
(72 | ) | 1,650 | 7,681 | | 9,259 | ||||||||||||
Amounts Due To (From) Subsidiaries |
| 159,482 | | (159,482 | ) | | ||||||||||||
Investment in Subsidiaries |
1,751,705 | 245,060 | 248,675 | (2,245,440 | ) | | ||||||||||||
Total Assets |
$ | 1,873,134 | $ | 1,168,177 | $ | 1,677,858 | $ | (2,404,922 | ) | $ | 2,314,247 | |||||||
25
(In thousands) | ||||||||||||||||||
Parent |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminations | Total | ||||||||||||||
Liabilities and Shareholders Equity |
|
|||||||||||||||||
Current Liabilities |
||||||||||||||||||
Accounts payable |
$ | 578 | $ | 22,944 | $ | 58,782 | $ | | $ | 82,304 | ||||||||
Accrued liabilities |
13,446 | 61,748 | 116,473 | | 191,667 | |||||||||||||
Credit facilities |
| | 5,896 | | 5,896 | |||||||||||||
Current maturities of
|
4,688 | 351 | 370 | | 5,409 | |||||||||||||
Deferred income tax liabilities |
1,455 | 227 | 5,612 | | 7,294 | |||||||||||||
Federal and foreign
|
(12,498 | ) | (1,386 | ) | 15,553 | | 1,669 | |||||||||||
Total Current Liabilities |
7,669 | 83,884 | 202,686 | | 294,239 | |||||||||||||
Long-Term Debt, Net |
472,385 | 36,259 | 11,514 | | 520,158 | |||||||||||||
Deferred Income Tax Liabilities |
34,263 | (312 | ) | 96,505 | | 130,456 | ||||||||||||
Pension and Post-Retirement Obligations |
11,892 | 51,825 | 29,898 | | 93,615 | |||||||||||||
Other Liabilities |
9,020 | | 11,007 | | 20,027 | |||||||||||||
Amounts Due To (From) Subsidiaries |
84,884 | | 136,864 | (221,748 | ) | | ||||||||||||
Shareholders Equity |
1,253,021 | 996,521 | 1,189,384 | (2,183,174 | ) | 1,255,752 | ||||||||||||
Total Liabilities and Shareholders Equity |
$ | 1,873,134 | $ | 1,168,177 | $ | 1,677,858 | $ | (2,404,922 | ) | $ | 2,314,247 | |||||||
26
Condensed Consolidating Statement of Operations for the three month period ended January 30, 2009.
(In thousands) | ||||||||||||||||||||
Parent |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminations | Total | ||||||||||||||||
Net Sales |
$ | | $ | 187,180 | $ | 122,814 | $ | (277 | ) | $ | 309,717 | |||||||||
Cost of Sales |
| 125,145 | 82,697 | (277 | ) | 207,565 | ||||||||||||||
| 62,035 | 40,117 | | 102,152 | ||||||||||||||||
Expenses |
||||||||||||||||||||
Selling, general and administrative |
| 32,380 | 27,345 | | 59,725 | |||||||||||||||
Research, development
|
| 7,667 | 9,731 | | 17,398 | |||||||||||||||
Other expense (income) |
1,250 | 10,687 | (6,923 | ) | | 5,014 | ||||||||||||||
Total Expenses |
1,250 | 50,734 | 30,153 | | 82,137 | |||||||||||||||
Operating Earnings From Continuing Operations |
(1,250 | ) | 11,301 | 9,964 | | 20,015 | ||||||||||||||
Interest income | (5,224 | ) | (1,107 | ) | (7,372 | ) | 13,292 | (411 | ) | |||||||||||
Interest expense | 6,324 | 5,123 | 8,581 | (13,292 | ) | 6,736 | ||||||||||||||
Income (Loss) From
|
(2,350 | ) | 7,285 | 8,755 | | 13,690 | ||||||||||||||
Income Tax Expense (Benefit) |
(443 | ) | (667 | ) | 3,278 | | 2,168 | |||||||||||||
Income (Loss) From
|
(1,907 | ) | 7,952 | 5,477 | | 11,522 | ||||||||||||||
Income Attributable to Noncontrolling Interests |
| | (35 | ) | | (35 | ) | |||||||||||||
Income (Loss) From
|
(1,907 | ) | 7,952 | 5,442 | | 11,487 | ||||||||||||||
Income From Discontinued
|
| 15,456 | | | 15,456 | |||||||||||||||
Equity in Net Income of Consolidated Subsidiaries |
28,850 | 1,279 | 6,346 | (36,475 | ) | | ||||||||||||||
Net Income (Loss)
|
$ | 26,943 | $ | 24,687 | $ | 11,788 | $ | (36,475 | ) | $ | 26,943 | |||||||||
27
Condensed Consolidating Statement of Cash Flows for the three month period ended January 30, 2009.
(In thousands) | ||||||||||||||||||||
Parent |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminations | Total | ||||||||||||||||
Cash Flows Provided (Used)
|
|
|||||||||||||||||||
Net earnings (loss) including noncontrolling interests |
$ | 26,943 | $ | 24,687 | $ | 11,823 | $ | (36,475 | ) | $ | 26,978 | |||||||||
Depreciation & amortization |
| 7,267 | 7,224 | | 14,491 | |||||||||||||||
Deferred income taxes |
(612 | ) | (285 | ) | (224 | ) | | (1,121 | ) | |||||||||||
Share-based compensation |
| 1,130 | 842 | | 1,972 | |||||||||||||||
Gain on sale of
|
| (26,379 | ) | | | (26,379 | ) | |||||||||||||
Working capital changes, net of effect of acquisitions: |
||||||||||||||||||||
Accounts receivable |
(123 | ) | 12,295 | 19,474 | | 31,646 | ||||||||||||||
Inventories |
| (3,217 | ) | (10,002 | ) | | (13,219 | ) | ||||||||||||
Prepaid expenses |
| (425 | ) | (2,035 | ) | | (2,460 | ) | ||||||||||||
Other current assets |
| | 446 | | 446 | |||||||||||||||
Accounts payable |
(302 | ) | (5,604 | ) | (8,904 | ) | | (14,810 | ) | |||||||||||
Accrued liabilities |
(4,158 | ) | (7,482 | ) | (7,709 | ) | | (19,349 | ) | |||||||||||
Federal & foreign
|
41 | 7,108 | 622 | | 7,771 | |||||||||||||||
Other liabilities |
3,086 | (108 | ) | 1,734 | | 4,712 | ||||||||||||||
Other, net |
2,915 | 186 | (9,611 | ) | | (6,510 | ) | |||||||||||||
27,790 | 9,173 | 3,680 | (36,475 | ) | 4,168 | |||||||||||||||
Cash Flows Provided (Used)
|
|
|||||||||||||||||||
Purchases of capital assets |
| (4,498 | ) | (3,023 | ) | | (7,521 | ) | ||||||||||||
Proceeds from sale of
|
| 62,944 | | 62,944 | ||||||||||||||||
Proceeds from sale of
|
| 30 | 64 | | 94 | |||||||||||||||
Acquisitions of businesses,
|
| (89,519 | ) | (161,258 | ) | | (250,777 | ) | ||||||||||||
| (31,043 | ) | (164,217 | ) | | (195,260 | ) |
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(In thousands) | |||||||||||||||||||
Parent |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminations | Total | |||||||||||||||
Cash Flows Provided (Used)
|
|
||||||||||||||||||
Proceeds provided by stock issuance under employee stock plans |
1,575 | | | | 1,575 | ||||||||||||||
Net change in credit facilities |
115,000 | | (1,295 | ) | | 113,705 | |||||||||||||
Repayment of long-term debt |
(4,047 | ) | (254 | ) | 2,986 | | (1,315 | ) | |||||||||||
Net change in intercompany financing |
(198,381 | ) | 2,697 | 159,209 | 36,475 | | |||||||||||||
(85,853 | ) | 2,443 | 160,900 | 36,475 | 113,965 | ||||||||||||||
Effect of foreign exchange rates on cash |
| (134 | ) | (2,153 | ) | | (2,287 | ) | |||||||||||
Net decrease in cash
|
(58,063 | ) | (19,561 | ) | (1,790 | ) | | (79,414 | ) | ||||||||||
Cash and cash equivalents
|
80,884 | 21,913 | 57,848 | | 160,645 | ||||||||||||||
Cash and cash equivalents
|
$ | 22,821 | $ | 2,352 | $ | 56,058 | $ | | $ | 81,231 | |||||||||
29
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Overview
We operate our businesses in three segments: Avionics & Controls, Sensors & Systems and Advanced Materials. Our segments are structured around our technical capabilities.
The Avionics & Controls segment includes avionics systems, control systems, interface technologies and communication systems capabilities. Avionics systems designs and develops cockpit systems integration and avionics solutions for commercial and military applications. Control systems designs and manufactures technology interface systems for military and commercial aircraft and land- and sea-based military vehicles. Interface technologies manufactures and develops custom control panels, input systems for medical, industrial, military and gaming industries. Communication systems designs and manufactures military audio and data products for severe battlefield environments. In addition, communication systems designs and manufactures communication control systems to enhance security and aural clarity in military applications.
The Sensors & Systems segment includes power systems and advanced sensors capabilities. Power systems develops and manufactures electrical power switching and other related systems, principally for aerospace and defense customers. Advanced sensors develops and manufactures high precision temperature and pressure sensors for aerospace and defense customers.
The Advanced Materials segment includes engineered materials and defense technologies capabilities. Engineered materials develops and manufactures thermally engineered components and high-performance elastomer products used in a wide range of commercial aerospace and military applications. Defense technologies develops and manufactures combustible ordnance components and warfare countermeasure devices for military customers. Sales in all segments include domestic, international, defense and commercial customers.
Our current business and strategic plan focuses on the continued development of our products principally for aerospace and defense markets. We are concentrating our efforts to expand our capabilities in these markets and anticipate the global needs of our customers and respond to such needs with comprehensive solutions. These efforts focus on continuous research and new product development, acquisitions and strategic realignments of operations to expand our capabilities as a more comprehensive supplier to our customers across our entire product offering.
On November 3, 2008, we sold Muirhead Aerospace Limited (Muirhead) and Traxsys Input Products Limited (Traxsys), which were included in the Sensors & Systems segment. The results of Muirhead and Traxsys were accounted for as a discontinued operation in the consolidated financial statements.
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On December 15, 2008, we acquired NMC Group, Inc. (NMC), which designs and manufactures specialized light-weight fasteners principally for commercial aviation applications. NMC is included in our Advanced Materials segment.
On January 26, 2009, we acquired Racal Acoustics Global Ltd. (Racal Acoustics), which develops and manufactures high technology ruggedized personal communication equipment for the defense and avionics segment. Racal Acoustics is included in our Avionics & Controls segment.
Income from continuing operations was $12.7 million, or $0.42 per diluted share, compared with $11.5 million, or $0.38 per diluted share, in the prior-year period, reflecting expected performance in a down commercial aviation market and a 25.5% effective income tax rate compared to an 18.9% effective income tax rate in the prior-year period. During the first fiscal quarter of 2010, our operating results benefited from solid earnings from our Avionics & Controls segment, which were substantially offset by lower earnings of our Sensors & Systems and Advanced Materials segments. Avionics & Controls earnings reflected increased sales and earnings from defense programs and incremental earnings from the Racal Acoustics acquisition. Sensors & Systems earnings were impacted by lower sales and gross margins due to competitive pressures and the commercial aviation downturn in particular. Advanced Materials earnings were principally impacted by lower gross margins at our combustible ordnance operations. Income from continuing operations in the first fiscal quarter of 2009 was impacted by a foreign currency loss of $7.9 million relating to the pound sterling-denominated funding of Racal Acoustics. The increase in the effective income tax rate from the prior-year period reflected a change in tax law in France, the expiration of U.S. research and development credits and changes in U.S. and Canada Tax Treaty. In addition, the prior-year periods effective income tax rate reflected tax benefits associated with the $7.9 million foreign currency loss.
Income from discontinued operations for the first fiscal quarter of 2009 was $0.52 per diluted share reflecting the gain on sale of our U.K.-based Muirhead and Traxsys subsidiaries in November 2008. Net income was $12.7 million, or $0.42 per diluted share, compared with net income of $26.9 million, or $0.90 per diluted share, in the prior-year period.
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Results of Operations
Three Month Period Ended January 29, 2010 Compared with Three Month Period Ended January 30, 2009
Sales for the first fiscal quarter increased 9.6% when compared with the prior-year period. Sales by segment were as follows:
(In thousands)
Incr./(Decr.)
from prior year period |
Three Months Ended | |||||||
January 29,
2010 |
January 30,
2009 |
|||||||
Avionics & Controls |
32.5% | $ | 170,257 | $ | 128,468 | |||
Sensors & Systems |
(11.6)% | 74,742 | 84,555 | |||||
Advanced Materials |
(2.4)% | 94,361 | 96,694 | |||||
Total Net Sales |
$ | 339,360 | $ | 309,717 | ||||
The 32.5% increase in sales of Avionics & Controls was principally due to strong sales at our avionics systems and interface technologies operations and $16.9 million in incremental sales from the Racal Acoustics acquisition. Avionics systems sales increases were mainly due to production shipments of the T-6B military trainer and a military transport cockpit retrofit, which aggregated approximately $19.0 million. Sales at our interface technologies operations increased due to higher sales of our custom input systems for casino gaming machines. These increases were partially offset by lower control systems sales for aerospace applications.
The 11.6% decrease in sales of Sensors & Systems mainly reflected lower OEM sales of temperature sensors and certain power systems devices for regional and business jets. These decreases were partially offset by the effect of exchange rates at our non-U.S. operations. Sales in the first fiscal quarter of 2010 reflected a stronger pound sterling and euro relative to the U.S. dollar. The average exchange rate from the pound sterling to the U.S. dollar increased from 1.51 in the first fiscal quarter of 2009 to 1.62 in the first fiscal quarter of 2010. The average exchange rate from the euro to the U.S. dollar increased from 1.32 in the first fiscal quarter of 2009 to 1.46 in the first fiscal quarter of 2010.
The 2.4% decrease in sales of Advanced Materials principally reflected lower sales of combustible ordnance, thermally engineered components, and elastomer components. These decreases were partially offset by higher sales of flare countermeasure devices at our U.K. operation.
Avionics & Controls segment gross margin was 33.2% and 35.7% for the first fiscal quarter of 2010 and 2009, respectively. The decrease in Avionics & Controls segment gross margin mainly reflected sales mix and a lower recovery of fixed costs at our control systems operations. These decreases were partially offset by incremental gross profit from the Racal Acoustics acquisition.
Sensors & Systems segment gross margin was 32.6% and 35.2% for the first fiscal quarter of 2010 and 2009, respectively. The decrease in gross margin was due to our advanced sensors
32
operations, which were impacted by a lower recovery of fixed costs and competitive pricing pressures. Additionally, gross margin in the prior-year period benefited from retroactive price agreements. In the first fiscal quarter of 2010 these decreases to gross margin were partially offset by sales of power systems for military applications with a higher gross margin.
Advanced Materials segment gross margin was 25.1% compared to 27.4% for the same period one year ago. The decrease in Advanced Materials gross margin principally reflected lower gross margins at our combustible ordnance operations due to enhanced quality control requirements on certain mortar increments. Additionally, gross margin was impacted by lower pricing options under a certain combustible ordnance contract with the U.S. government. These decreases were partially offset by improved gross margins at our U.K. flare operations. Gross margins at our engineered material operations increased slightly compared to the prior-year period.
Selling, general and administrative expenses (which include corporate expenses) totaled $62.3 million, or 18.4% of sales, and $59.7 million, or 19.3% of sales, for the first fiscal quarter of 2010 and 2009, respectively. The increase in selling, general and administrative expense principally reflected incremental selling, general and administrative expense from the acquisition of Racal Acoustics and NMC.
Research, development and engineering spending was $17.0 million, or 5.0% of sales, for the first fiscal quarter of 2010 compared with $17.4 million, or 5.6% of sales, for the first fiscal quarter of 2009. The decrease in research, development and engineering reflected the completion of the development of the integrated cockpit for the T-6B military trainer and other programs, partially offset by development spending on advanced sensors for the A-350. Fiscal 2010 research, development and engineering spending is expected to be approximately 5.0% of sales.
Segment earnings (operating earnings excluding corporate expenses and other income or expense) for the first fiscal quarter of 2010 totaled $33.3 million, or 9.8% of sales, compared with $34.7 million, or 11.2% of sales, for the first fiscal quarter in 2009.
Avionics & Controls segment earnings were $19.4 million, or 11.4% of sales, in the first fiscal quarter of 2010 and $14.5 million, or 11.3% of sales, in the first fiscal quarter of 2009, principally reflecting higher earnings of our avionics systems unit on increased sales volume and gross profit on our integrated cockpit for the T-6B military trainer and a military transport cockpit retrofit, and lower research, engineering and development. Additionally, earnings of our technology interface systems operations were strong compared with the prior-year period due to higher sales and improved profitability of our custom input systems for casino gaming machines. These increases were partially offset by lower earnings from our control systems operations. We incurred $1.2 million in lease termination costs resulting from a facilities move. In addition, gross profit decreased from the prior-year period due to a lower recovery of fixed overhead costs.
Sensors & Systems segment earnings were $5.1 million, or 6.8% of sales, for the first fiscal quarter of 2010 compared with $10.3 million, or 12.1% of sales, for the first fiscal quarter of 2009. The decrease in segment earnings principally reflects lower sales and gross margins at our temperature and pressure sensor operations and start-up costs incurred to set up a manufacturing
33
operation in Mexico. Our temperature and pressure sensors operations have been impacted by a very competitive market and the downturn in commercial aviation. Earnings at our power systems operations were solid and slightly better than the prior-year period.
Advanced Materials segment earnings were $8.7 million, or 9.3% of sales, for the first fiscal quarter of 2010 compared with $10.0 million, or 10.3% of sales, for the first fiscal quarter of 2009, principally reflecting lower earnings from our combustible ordnance operations and partially offset by improved earnings at our U.K. flare countermeasure operations. Earnings at our U.K. flare countermeasure operations benefited from international shipments, which had been delayed at October 30, 2009. Our engineered materials operations improved their profitability as a percentage of sales compared with the prior-year period with lower sales volumes due to strong cost control.
On January 26, 2009, we acquired Racal Acoustics for £122.6 million or $171.3 million. Racal Acoustics develops and manufactures high technology ruggedized personal communication equipment for the defense and avionics market segment. The acquisition was funded with cash proceeds from the sale of U.K.-based Muirhead and Traxsys and our line of credit. To facilitate the acquisition of Racal Acoustics, we executed a $159.7 million U.S. dollar-denominated intercompany loan with a wholly owned subsidiary, for which its functional currency is the pound sterling. Due to our holding of pounds sterling to fund the acquisition during a period of foreign exchange volatility, we incurred a $7.9 million foreign currency transaction loss in January 2009, which was recorded in other expense.
Interest expense for the first fiscal quarter of 2010 was $8.0 million compared with $6.7 million for the first fiscal quarter of 2009, reflecting higher borrowings during most of the first fiscal quarter of 2010.
The effective income tax rate for the first fiscal quarter of 2010 was 25.5% (before a $0.3 million tax expense) compared with 18.9% (before a $0.4 million tax benefit) for the prior-year period. The $0.3 million tax expense in the first fiscal quarter of 2010 was the result of a change in the tax law of France. The $0.4 million tax benefit in the first fiscal quarter of 2009 was the result of two events. The first event was a $2.0 million reduction of previously recorded withholding tax liabilities as a result of the enactment of a U.S.-Canadian tax treaty. The second event was the recording of a $1.6 million penalty due to a development with regard to certain foreign tax laws. The effective tax rate differed from the statutory rate in the first fiscal quarters of 2010 and 2009, as both years benefited from various tax credits and certain foreign interest expense deductions.
It is reasonably possible that within the next 12 months, $6.7 million of unrecognized foreign tax benefits associated with losses on the disposition of assets could decrease as a result of the expiration of a statute of limitations and be recognized in net income.
To the extent that sales are transacted in a currency other than the functional currency of the operating unit, we are subject to foreign currency fluctuation risk.
34
We use forward contracts to hedge our foreign currency exchange risk. To the extent that these hedges qualify under U.S. GAAP, the amount of gain or loss is deferred in Accumulated Other Comprehensive Income (AOCI) until the related sale occurs. Also, we are subject to foreign currency gains or losses from embedded derivatives on backlog denominated in a currency other than the functional currency of our operating companies or its customers. Gains and losses on forward contracts, embedded derivatives, and revaluation of assets and liabilities denominated in currency other than the functional currency of the Company for the first fiscal quarter of 2010 and 2009 are as follows:
(In thousands) | Three Months Ended | |||||||
January 29,
2010 |
January 30,
2009 |
|||||||
Forward foreign currency contracts gain (loss) |
$ | 114 | $ | (3,844 | ) | |||
Forward foreign currency contracts reclassified from AOCI |
1,998 | (5,422 | ) | |||||
Embedded derivatives gain (loss) |
(425 | ) | 711 | |||||
Revaluation of monetary assets/liabilities loss |
(800 | ) | (9,130 | ) | ||||
Total |
$ | 887 | $ | (17,685 | ) | |||
New orders for the first fiscal quarter of 2010 were $342.8 million compared with $370.2 million for the same period in 2009. The decrease in orders principally reflected approximately $65.2 million in backlog acquired from the Racal Acoustics and NMC acquisitions in the first fiscal quarter of 2009. Backlog was $1.1 billion compared with $1.2 billion at the end of the prior-year period and $1.1 billion at the end of fiscal 2009.
35
Liquidity and Capital Resources
Cash and cash equivalents at January 29, 2010, totaled $187.1 million, an increase of $10.3 million from October 30, 2009. Net working capital increased to $509.4 million at January 29, 2010, from $502.4 million at October 30, 2009. Sources and uses of cash flows from operating activities principally consist of cash received from the sale of products and cash payments for material, labor and operating expenses. Cash flows provided by operating activities were $30.4 million and $4.2 million in the first fiscal quarter of 2010 and 2009, respectively. The increase principally reflected higher cash receipts and lower payments for inventory.
Cash flows used by investing activities were $14.8 million and $195.3 million in the first fiscal quarter of 2010 and 2009, respectively. Cash flows used by investing activities in the first fiscal quarter of 2010 primarily reflected cash paid for capital expenditures. Cash flows used by investing activities in the prior-year period reflected approximately $250.8 million for the acquisitions of NMC and Racal Acoustics, and $7.5 million in purchases of capital assets, partially offset by proceeds from the sale of Muirhead and Traxsys of $62.9 million.
Cash flows used by financing activities were $3.3 million in the first fiscal quarter of 2010 and principally reflected cash payments on our credit facilities and long-term debt. Cash flows provided by financing activities were $114.0 million in the first fiscal quarter of 2009 and principally reflected a $113.7 million increase in our credit facility to finance the Racal Acoustics acquisition.
On December 15, 2008, the Company acquired all of the outstanding capital stock of NMC Group, Inc. (NMC) for approximately $90.1 million in cash, including acquisition costs. The acquisition was funded from existing cash. NMC designs and manufactures specialized light-weight fasteners principally for commercial aviation applications.
On January 26, 2009, the Company acquired all of the outstanding capital stock of Racal Acoustics Global Ltd. (Racal Acoustics) for approximately $171.3 million in cash, including acquisition costs. Racal Acoustics develops and manufactures high technology ruggedized personal communication equipment for the defense and avionics segment. The acquisition was funded from proceeds from the sale of Muirhead and Traxsys and our credit facility.
Capital expenditures, consisting of machinery, equipment and computers, are anticipated to be approximately $50.0 million during fiscal 2010, compared with $87.4 million expended in fiscal 2009. Capital expenditures for fiscal 2009 included $28.2 million under a capitalized lease obligation related to our newly constructed facility for an avionics controls operation and a facility expansion for an interface technologies facility. Capital expenditures for the first fiscal quarter of 2010 totaled $20.1 million, primarily for machinery and equipment, building, construction in process, and enhancements to information systems. Capital expenditures for the first quarter of 2010 included $6.0 million under capitalized lease obligations for our newly constructed avionics and controls facility and facility expansion noted above.
36
Total debt at January 29, 2010, was $534.0 million and consisted of $175.0 million of Senior Notes due in 2017, $175.9 million of Senior Subordinated Notes due in 2013, $125.0 million of the U.S. Term Loan, $2.2 million of deferred gain on a terminated interest rate swap, $42.0 million under capital lease obligations, and $13.9 million under our credit facility and various foreign currency debt agreements and other debt agreements.
We believe cash on hand and funds generated from operations are adequate to service operating cash requirements and capital expenditures through fiscal 2010.
Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases you can identify forward-looking statements by terminology such as anticipate, believe, continue, could, estimate, expect, intend, may, might, plan, potential, predict, should or will or the negative of such terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risk factors set forth in Forward-Looking Statements and Risk Factors in our Annual Report on Form 10-K for the fiscal year ended October 30, 2009, that may cause our or the industrys actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. You should not place undue reliance on these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievements. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included or incorporated by reference into this report are made only as of the date hereof. We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
There have been no significant changes in our exposure to market risk during the first three months of fiscal 2010. A discussion of our exposure to market risk is provided in the Companys Annual Report on Form 10-K for the fiscal year ended October 30, 2009.
Item 4. | Controls and Procedures |
Our principal executive and financial officers evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of January 29, 2010. Based upon that evaluation, they concluded as of January 29, 2010, that our disclosure controls and procedures were effective to ensure that information we are required to disclose in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within time periods specified in Securities and Exchange Commission rules and forms. In addition, our principal executive and financial officers concluded as of January 29, 2010, that our
37
disclosure controls and procedures are also effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
During the time period covered by this report, there were no significant changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. | Legal Proceedings |
From time to time we are involved in legal proceedings arising in the ordinary course of business. We believe that adequate reserves for these liabilities have been made and that there is no litigation pending that could have a material adverse effect on our results of operations and financial condition.
Item 6. Exhibits
10.1 | Esterline Technologies Corporation Fiscal Year 2010 Annual Incentive Plan. | |
10.2 | Esterline Technologies Corporation Long-Term Incentive Plan. | |
10.3 | Summary of Non-Employee Director Compensation for Services on the Board of Directors of Esterline Technologies Corporation. | |
10.4 | Lease Extension Agreement between Weir Redevelopment Company and Kirkhill TA Corporation dated October 30, 2009. | |
11 | Schedule setting forth computation of basic and diluted earnings per common share for the three month periods ended January 29, 2010, and January 30, 2009. | |
31.1 | Certification of Chief Executive Officer. | |
31.2 | Certification of Chief Financial Officer. | |
32.1 | Certification (of R. Bradley Lawrence) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. | |
32.2 | Certification (of Robert D. George) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. |
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
ESTERLINE TECHNOLOGIES CORPORATION | ||||||
(Registrant) | ||||||
Dated: March 4, 2010 | By: | /s/ Robert D. George | ||||
Robert D. George Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer) |
39
EXHIBIT 10.1
FY10 Annual Incentive Compensation Plan
Esterline Technologies Corporation
1. | Purpose. The Board of Directors has established this Plan to encourage Esterline officers and senior managers to make prudent decisions that will strengthen current year financial results for shareholders. The Plan is designed to reward participants for successful achievement of an earnings objective, and to provide incentives for them to achieve outstanding results. |
2. | Membership. The Board will appoint selected officers and senior managers from among Esterlines corporate staff to Plan membership. Individuals become members upon return of a signed acceptance. |
3. | Objective. The Plans earnings objective will be determined by the Boards Compensation Committee, and approved by the Board at the beginning of the fiscal year. |
4. | Incentive Formula. |
a. | Target Incentive Compensation. The Board will establish a target incentive compensation award level for each member (target IC), which will range from 5% to 60% of the members base salary as of fiscal year-end. Esterline will pay the target IC amount if the corporation achieves its earnings objective, subject to other terms of this Plan. |
b. | Threshold. Members will earn no IC if the corporations earnings fall below a minimum established by the Board (Plan threshold). At the Plan threshold, members will earn 25% of their target IC. |
c. | Maximum. Members may earn up to 200% of their target IC for exceptional achievement if corporate earnings exceed the Plans objective and reach this Plan maximum. Plan members will earn no additional IC for achievement above the Plan maximum. |
d. | Proportionate Awards. Between the Plan threshold and Plan maximum, member earnings will increase or decrease from target levels in direct proportion to incremental achievement. |
5. | General Terms. |
a. | Plan Administration. The Board has delegated administrative authority to its Compensation Committee, which shall consider any issues arising under the Plan, oversee Plan award calculations, and make recommendations to the Board for final approval. |
b. | Adjustments. The Compensation Committee may exercise its discretion to recommend the Board either subtract from or add to computed awards, provided, however, that the Compensation committee may not adjust awards for any member who is a covered employee for purposes of Section 162(m) of the Internal Revenue Code of 1986 in such a manner as would increase the amount of compensation |
otherwise payable to that employee. The maximum range of such adjustments is limited to either 25% of the members computed award or 25% of the members target IC, whichever is greater.
c. | Calculations. Esterline will calculate earnings per share on a fully-diluted basis, as audited, and before extraordinary items. |
d. | Payment. Esterline will pay Plan awards within 60 days following fiscal year-end, provided: |
|
Company auditors have issued an opinion that supports earnings calculations; |
|
The Board has approved the proposed awards; and, |
|
Members remain employed through the entire fiscal year and through the payment date, except as provided in sections 5f and 5g below. |
e. | Employment. This Plan does not affect members terms of employment, except as specifically provided here. This Plan does not guarantee continued employment. Members remain subject to usual Esterline policies and practices. |
f. | Partial Year Membership. If an employee is appointed to the Plan mid-year, Esterline will pay a pro-rata amount based on the members period of employment, and on the terms under which they were appointed to the Plan. |
g. | Termination. If a member leaves Esterline employment prior to the Plan payment date for any reason, whether voluntary or involuntary, s/he shall forfeit any IC award otherwise earned, except: |
i. | The Board may exercise its discretion to grant a pro-rata award to a terminated employee based on his/her period of employment; or, |
ii. | If a member leaves due to retirement, disability or death, Esterline will pay a pro-rata amount based on the members period of active employment. |
h. | Entire Agreement. This Plan, together with the members appointment letter comprise the entire agreement between the member and Esterline with respect to these subjects. |
i. | Modification. The Board may modify or terminate this Plan at any time, provided it pays members on a pro-rata basis for any IC earned prior to such change. |
Approved by the Board and issued on its behalf:
/s/ R. Bradley Lawrence |
R. Bradley Lawrence |
President & CEO |
December 10, 2009 |
FY10 Annual IC Plan
Page 2
EXHIBIT 10.2
Esterline Technologies Corporation
2004 Equity Incentive Plan
LONG TERM INCENTIVE PLAN
1. Purpose. Esterline Technologies Corporation (the Company) has designed this Long Term Incentive Plan (LTIP) to reward its officers and selected senior executives for their contributions to the long-term performance of the Company. The LTIP rewards effective use of the Companys resources to achieve expected and superior performance.
2. Participation.
(a) The Companys officers and other senior executive employees are eligible to participate in this LTIP, subject to selection and appointment by the Companys Board of Directors (the Board) at the beginning of each performance period. Appointment as a participant in one or more performance periods does not entitle employees to continued participation for subsequent periods. Each participant in this LTIP for a particular performance period will receive an appointment in the form attached.
(b) The Board may also appoint new participants during any current performance period. They will receive a pro-rata award based on the remaining portion of the performance period.
3. Performance Periods. The LTIP performance periods will be three years in duration, beginning on the first day of the Companys fiscal year and ending on the last day of the third fiscal year thereafter, except for an initial implementation phase. A new three-year performance period will start with each new fiscal year, such that when the LTIP is fully-implemented, there will be three overlapping LTIP performance periods at any given time, as illustrated below. The Board may establish shorter performance periods as it determines are reasonable to implement this LTIP.
4. Performance Measures & Goals. The LTIP has two performance measures: average return on invested capital (ROIC); and cumulative compound earnings per share growth (EPSG). At the beginning of each performance period the Board will set ROIC and EPSG goals
combined on a matrix to show their relative relationship and importance (LTIP Matrix). A sample LTIP matrix is attached.
5. Target and Actual Awards. The Board will establish a target cash award for each participant. Participants actual awards will equal their target awards if the Company fully achieves the target LTIP goals. Participants actual awards will vary from their target awards if the Company performs above or below target LTIP goals. Participants will receive no award for performance less than the minimum LTIP goals. Actual awards for superior performance are subject to a maximum of 400% of a participants target award.
6. Calculations. The Board will use the following formulas to determine Company performance and actual awards:
(a) Average Return on Invested Capital (ROIC) Fiscal year end net income (before extraordinary items), divided by the monthly average invested capital during the corresponding fiscal year, averaged over the applicable performance period, and expressed as a percentage.
(b) Cumulative Compound Earnings Per Share Growth (EPSG) Cumulative growth in fully diluted EPS (net income before extraordinary items, divided by the monthly average of total common shares outstanding), measured as the annualized percentage compound growth over the applicable performance period.
(c) Pro-rata participants For participants appointed during a performance period under section 2c above, the Company will calculate a pro forma amount as though the participant had been appointed for the full performance period, and then reduce that amount by an appropriate factor, based on the participants appointment date.
7. Adjustments. In rare circumstances, the Board may exercise its discretion, consistent with the 2004 Plan, to either: (a) subtract from or add to a participants actual award; or (b) adjust the LTIPs performance goals. This would occur only if unusual events or business conditions develop after the beginning of a performance period, such as significant acquisitions or divestitures that materially alter earnings or returns. Provided, however, the Board may not adjust awards for any participant who is a covered employee for purposes of Section 162(m) of the Internal Revenue Code of 1986 in such a manner as would increase the amount of compensation otherwise payable to that employee.
8. Payments. The Company will pay LTIP awards no later than two-and-a-half months following approval by the Boards Audit Committee of the Companys financial reports for the pertinent fiscal periods.
9. Continuous Employment. Except as provided below, to receive an LTIP award payment participants must be actively employed by the Company throughout the entire performance period and through the date on which the Company pays LTIP awards for that performance period. Appointments will end automatically for participants who do not satisfy this employment condition and no LTIP award payments will be earned or due. The Company considers approved leaves of absence to be active employment, provided they do not exceed the amount of leave to which a participant might be entitled under applicable Company policies, and under disability, family and medical leave laws. For approved leaves that exceed such limits, payment of LTIP awards, if any, is subject to Board discretion.
Long Term Incentive Plan
Page 2
10. End of Employment.
(a) Suspension, Resignation, or Discharge. All a participants rights under this plan will be suspended during any period of suspension from employment. A participants appointment will automatically end when s/he leaves employment with the Company for any reason other than Retirement, Disability, or death.
(b) Retirement, Disability, or Death. If a participant leaves employment with the Company due to Retirement, Disability, or death, the Company will pay the participants actual award for the full performance period in the normal course, provided the participant completed at least one year of continuous, active employment during the performance period. If a participant does not complete this minimum employment period, his/her appointment will automatically end, and no LTIP award will be earned or due.
(c) Other. The Board may immediately cancel a participants appointment and recover any payments made if it discovers facts that, if known earlier, would have constituted grounds for termination of employment for Cause.
11. LTIP Terms. The Company established this LTIP pursuant to its 2004 Equity Incentive Plan (2004 Plan). The terms of a participants appointment, this LTIP document, and the 2004 Plan together constitute the LTIP terms.
12. Employment Terms. The LTIP terms do not affect participants terms of employment, except as specifically provided in the LTIP terms. They do not guarantee continued employment. Participants remain subject to usual Company policies and practices, and to any other employment agreements, service terms, appointments, or mandates to which they are otherwise subject.
13. Plan Administration. The Board has delegated administrative authority to its Compensation Committee (Committee), which will consider any issues arising under the LTIP terms, oversee award calculations, and make recommendations to the Board for final approval. The Board has sole and final authority to determine Plan achievement and actual awards.
14. Plan Interpretation. All references to the Company include a Related Company, as that term is defined in the 2004 Plan. Definitions in the 2004 Plan apply to terms used in this LTIP unless otherwise defined here. On any issues of interpretation, the Committees decisions will be final and binding.
15. Modification. The Board may modify or terminate this LTIP at any time.
Approved by the Board December 10, 2009.
/s/ R. Bradley Lawrence |
R. Bradley Lawrence |
President & CEO |
Long Term Incentive Plan
Page 3
EXHIBIT 10.3
Summary of Non-Employee Director Compensation
For Service on the Board of Directors of Esterline Technologies Corporation
Compensation Paid to Non-Employee Directors | |||
Annual retainer for non-executive Chairman of the Board |
$ | 150,000 | |
Annual retainer for non-employee directors (other than the non-executive |
|||
Chairman of the Board) |
$ | 30,000 | |
Attendance (in person) at Board meeting (per meeting fee) |
$ | 1,500 | |
Attendance (by phone) at Board meeting (per meeting fee) |
$ | 750 | |
Annual issuance of fully-paid Common Stock |
$ | 72,000 | |
Compensation for Attendance at Committee Meetings | |||
Attendance (in person) at Committee meeting (per meeting fee) |
$ | 1,500 | |
Attendance (by phone or internet) at Committee meeting (per meeting fee) |
$ | 750 | |
Additional Compensation for Committee Chairpersons | |||
Audit Committee |
$ | 12,500 | |
Compensation Committee |
$ | 7,500 | |
Technology Committee |
$ | 5,000 | |
Nominating & Corporate Governance Committee |
$ | 5,000 | |
Executive Committee (per meeting fee attended in person) |
$ | 3,000 | |
Executive Committee (per meeting fee attended by phone or internet) |
$ | 1,500 | |
Additional Compensation for the Lead Independent Director |
$ | 25,000 |
EXHIBIT 10.4
LEASE EXTENSION AGREEMENT
BETWEEN
WEIR REDEVELOPMENT COMPANY
AND
KIRKHILL TA CORPORATION
Both Weir Redevelopment Company and Kirkhill TA Corporation agree to extend an original lease dated June 1, 1998, which has been extended and amended by mutual agreement since its inception. The extended term will incorporate the following revised terms.
1. | The term of the extended lease will be for one (1) year commencing on May 1, 2010 and terminating on April 30, 2011. |
2. | The annual base rent will be $224,016.00 payable monthly in advance in equal payments of $18,668.00. |
3. | Lessee may extend term for two (2) additional one (1) year terms with a six month notice to Lessor at the same annual base rent. |
Agreed to this day October 30, 2009 | ||||||
By: | /s/ Leonard S. Jolles | |||||
Leonard S. Jolles Weir Redevelopment Corporation | ||||||
By: | /s/ Jim Sweeney | |||||
Kirkhill TA Corporation |
EXHIBIT 11
ESTERLINE TECHNOLOGIES CORPORATION
Computation of Basic and Diluted Earnings Per Common Share
For the Three Month Periods Ended January 29, 2010 and January 30, 2009
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended | ||||||
January 29,
2010 |
January 30,
2009 |
|||||
Net Sales |
$ | 339,360 | $ | 309,717 | ||
Gross Margin |
104,529 | 102,152 | ||||
Net Earnings From Continuing Operations Attributable to Esterline |
$ | 12,725 | $ | 11,487 | ||
Net Earnings From Discontinued Operations Attributable to Esterline |
| 15,456 | ||||
Net Earnings Attributable to Esterline |
$ | 12,725 | $ | 26,943 | ||
Basic |
||||||
Weighted Average Number of Shares Outstanding |
29,789 | 29,664 | ||||
Earnings Per Share Attributable to Esterline Basic: |
||||||
Continuing Operations |
$ | .43 | $ | .39 | ||
Discontinued Operations |
| .52 | ||||
Earnings Per Share Attributable to Esterline Basic |
$ | .43 | $ | .91 | ||
Diluted |
||||||
Weighted Average Number of Shares Outstanding |
29,789 | 29,664 | ||||
Net Shares Assumed to be Issued for Stock Options |
429 | 201 | ||||
Weighted Average Number of Shares and Equivalent Shares Outstanding Diluted |
30,218 | 29,865 | ||||
Earnings Per Share Attributable to Esterline Diluted: |
||||||
Continuing Operations |
$ | .42 | $ | .38 | ||
Discontinued Operations |
| .52 | ||||
Earnings Per Share Attributable to Esterline Diluted |
$ | .42 | $ | .90 | ||
EXHIBIT 31.1
CERTIFICATIONS
I, R. Bradley Lawrence, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Esterline Technologies Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
1
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent function):
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Dated: March 4, 2010 | By: | /s/ R. Bradley Lawrence | ||||
R. Bradley Lawrence | ||||||
President and Chief Executive Officer | ||||||
(Principal Executive Officer) |
2
EXHIBIT 31.2
CERTIFICATIONS
I, Robert D. George, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Esterline Technologies Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
1
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent function):
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Dated: March 4, 2010 | By: | /s/ Robert D. George | ||||
Robert D. George | ||||||
Vice President, Chief Financial Officer, | ||||||
Secretary and Treasurer | ||||||
(Principal Financial Officer) |
2
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Esterline Technologies Corporation (the Company ) on Form 10-Q for the period ended January 29, 2010, as filed with the Securities and Exchange Commission on the date hereof (the Form 10-Q ), I, R. Bradley Lawrence, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: March 4, 2010 | By: | /s/ R. Bradley Lawrence | ||||
R. Bradley Lawrence | ||||||
President and Chief Executive Officer |
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Esterline Technologies Corporation (the Company ) on Form 10-Q for the period ended January 29, 2010, as filed with the Securities and Exchange Commission on the date hereof (the Form 10-Q ), I, Robert D. George, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: March 4, 2010 | By: | /s/ Robert D. George | ||||
Robert D. George | ||||||
Vice President, Chief Financial Officer, | ||||||
Secretary and Treasurer |